Expert Explains Cryptocurrencies & the Legal Issues for Small Businesses to Consider

Cryptocurrencies are becoming more and more mainstream as the internet of things becomes ever more solidified in our daily lives, and there is no stopping this trend. Since last year, Bitcoin, Ether, Litecoin, and other cryptocurrencies have worked themselves into the financial scene and we may be entering a revolution of the global financial system. This emerging global financial system eliminates banks and governments and puts the people in control. While this has its pros and cons, there are many mixed views about cryptocurrencies, and it's best to do your own research, utilize trusted resources, and proceed wisely.

If you're a small business planning to use or accept cryptocurrencies, General Counsel and Co-Founder of blockchain startup ExsulCoin, James Song sheds light on the legal issues you need to consider.

James Song (Photo Credit: James Song)

What is ExsulCoin?

ExsulCoin is a blockchain company building solutions to the global refugee crisis.

How did ExsulCoin come about? How does it work? And, how does it differ from other cryptocurrencies?

We’ve been working in refugee camps in the Burma-Bangladesh border for some time, and we recognized a need to innovate new ways of delivering small amounts of humanitarian aid. For instance, a refugee might only need $2 so she can buy some antibiotics in the market, but aid agencies will make her wait on a line for six hours to get it free at a clinic. As a woman, she might need that time to take care of her children, so she’ll decide not to wait on line and hope the illness gets better on its own. Refugees make heartbreaking choices like this every day.

We immediately realized the power of blockchain to fix this problem. Blockchain is really good at peer-to-peer transfers of value, and that’s exactly what we wanted to provide. But transfers weren’t enough. The biggest challenge for refugees is fitting into a new country and community where no one trusts them, and the way to solve this is through specialized work training and opportunities — things that allow refugees to integrate into their host communities.

We figured out how to solve the integration challenge using a combination of blockchain and our own cryptocurrency, ExsulCoin. Essentially, we pay people to learn. Instead of receiving an A or B in a training course, you receive an A or B digital token. These tokens can be traded up for blockchain-based tokens, which can then be converted to local money using a debit card. Since we’re already recording academic performance and transaction history on the blockchain, we figured we could also build profiles of individuals, and so we’re also building a reputation system. This allows us to match refugees to donors who would support them with high accuracy. In addition, tracking reputation on a public blockchain means we can go beyond credit scoring and generate “trustworthiness scores,” which are more accurate predictors of behavior than credit scores.

All of this taken together solves the major challenges refugees currently face with insufficient funding, education, and opportunities.

Why should small business embrace cryptocurrencies?

In the 90s, we asked the same question about websites and the internet — "should small businesses have a website?" And then, came this incredible revolution in how products are distributed in the world. The same thing is happening now, with blockchain. Lots of new technology that’s coming in the next few years will be blockchain-based and will be driven using cryptocurrencies, since they can do more than just hold monetary value.

How can small business help consumers embrace cryptocurrencies?

For instance, ExsulCoin is a cryptocurrency, but is also used to access our platform, as well as record academic performance. In this way, small businesses doesn’t have to help consumers embrace cryptocurrencies in the future; all they have to do is accept them. The usefulness of the cryptocurrency will drive adoption automatically.

What are the top legal factors that come with cryptocurrencies that small business should be aware of?

There are three main legal issues for small businesses to consider with cryptocurrencies:

AML/KYC Compliance - Most jurisdictions have laws prohibiting and criminalizing money laundering, or the transfer and use of funds for illegal or terrorist activities. U.S. criminal anti-money laundering laws (AML) mandate specific methods of recordkeeping by financial institutions to ensure that there is transparency in the sending and receiving of funds. Know Your Customer (KYC) is a subset of AML regulations that require financial institutions to know the identity of all of their customers. This requires extra due diligence on the part of the institution to constantly re-assess the risks posed by every single client. The anonymous, direct, and decentralized nature of cryptocurrencies make it difficult, and oftentimes impossible, to maintain these recordkeeping and identification standards. Cryptocurrencies’ inability to be fully AML compliant is one of the biggest hurdles to widespread adoption in cryptocurrency use. Lack of full AML compliance also presents potentially devastating risk to the stability of any cryptocurrency. For example, in the cannabis industry, changes in the legislative landscape led to sizable losses in value for cannabis-related investments. A change to the law, or a threat of change to the law, can potentially wipe out large portions of value for a specific cryptocurrency. This also offers a likely opportunity for anyone who can figure out a way to build AML and other protections into the blockchain.

Legality of cryptocurrency use - Some countries, like Bangladesh, have banned cryptocurrencies. In other places, financial institutions are unsure what to do with them and thus look to protect themselves from risk pre-emptively. For instance, in the U.S., major banks will close your business banking account if monetary transfers come in via a cryptocurrency exchange. I usually advise small businesses to work with smaller community banks because they will take the time to get to know you and your business, as well as work with you to understand the challenges faced by merging traditional banking with cryptocurrencies.

Investment Compliance - Many investors buy and sell cryptocurrencies directly on an exchange. However, there are many other ways that investors can make money in this field, including investing into a cryptocurrency fund or initial coin offering (ICO). Investments are carefully regulated, ensuring that investors are protected. Protections ensure that investors are financially qualified to take on financial risk, have enough financial sophistication to participate in an investment, and aren’t subjected to predatory or misleading advertising.

Do you have recommendations for businesses that want to accept cryptocurrencies?

Accepting cryptocurrencies is relatively easy. All you need is a cryptocurrency wallet, which is really just an easy way of accessing blockchain. The computer sends cryptocurrency to your wallet and, once you see the transfer has been made, you’re done. Cryptocurrency is just a word for digital cash. It’s just like paper cash, except digital cash lives on the internet.